The Latest Crackdown Of Climate Change Disclosures To The Sec – New York’s Martin Act Enforcement
Peabody Energy has agreed to disclose to its shareholders, the public, and the SEC, climate-related business risks going forward. In particular, the disclosures will address regulations concerning carbon emissions from coal businesses, like Peabody’s. In the past, Peabody claimed it did not have the ability to predict how much increased cost to the business would be incurred by climate change regulations. However, internally, Peabody had projected a one-third drop in U.S. coal sales due to anticipated regulations on power plants. In addition, Peabody didn’t fully disclose the findings of the International Energy Agency, which projected less coal demand due to climate-related regulations. Peabody has now agreed to include all the IEA projects in its quarterly securities filing with the SEC.
New York Attorney General Schneiderman has been investigating Peabody for several years under the State of New York’s Martin Act, regulating securities in the state. He stated Monday, November 9, 2015, “as a publicly traded company whose core business generates massive amounts of carbon emissions, Peabody Energy has a responsibility to be honest with its investors and the public about the risks posed by climate change, now and in the future.” The Martin Act is a 1921 piece of legislation in New York that gives extraordinary powers and discretion to the State Attorney General to fight financial fraud. This may be the first instance in its history that it was used (or threatened to be used) to force a company in New York to disclose impacts the company’s business may have on global climate change. Schneiderman has also been investigating ExxonMobil Corporation under the Martin Act’s powers. Specifically, New York General Business Law Article 23-A
- 352 Investigation by attorney-general, provides that “[t]he attorney-general may … require such other data and information as he may deem relevant and may make such special and independent investigations as he may deem necessary in connection with the matter.” Schneiderman is using the investigating powers to ascertain whether companies are not fully complying with SEC disclosure requirements pertaining to climate change. The allegations are that Peabody (or Exxon or…. ) violated the Martin Act’s prohibition of any fraud, deception, concealment, suppression, or false pretense, as well as any false statement or representation. Violators of the Martin Act are subject to felony conviction.
While Schneiderman is investigating under the NY Martin Act, there is also jurisdiction under the SEC climate change guidelines to require disclosure. On February 8, 2010, SEC’s “Guidance Regarding Disclosure Related to Climate Change” became effective.
Under SEC Regulation S-K, companies must reveal any material effect that environmental compliance costs may have on their business, including any regulations, any pending administrative or judicial proceedings to which they are a party, and any known trends, events or uncertainties that are likely to affect their bottom line. The Supreme Court test of “materiality” is whether “there is a substantial likelihood that a reasonable investor would find the availability of the information to significantly alter the total mix of information available in the decision making process.” The sections of SEC Regulation S-K that are relevant to the issue of climate risk disclosure are: Item 101 (disclosure of capital expenditures needed to respond to environmental compliance, projected over the subsequent two years); Item 103 (disclosure of pending legal proceedings involving more than 10 percent of current consolidated assets, and including environmental regulatory proceedings); Item 303 (management discussion & analysis, which requires disclosure of “known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.”); Item 504)c) (requiring a discussion of the most significant “risk factors” than makes an investment speculative or risky, including climate change risk factors).
With the emergence of mandatory state, regional, and federal programs addressing greenhouse gas (“GHG”) emissions, including for example operations in California that are subject to AB32 cap and trade regulations, disclosure under Item 101 could be triggered. Risks to a company’s finances and operations from future GHG caps and regulatory requirements also may be required to be disclosed under Item 303 to the extent material impacts are reasonably likely to occur.